Describe the nature and extent of securities litigation in your jurisdiction.
Securities litigation in Germany has become ubiquitous, certainly since around 17,000 investors filed lawsuits against Deutsche Telekom AG based on allegedly false statements in its prospectus for a public offering in 2000. To help the court cope with the resulting caseload, the legislature enacted Germany’s first collective litigation scheme, the Capital Investors Model Proceedings Act, in 2005 (KapMuG).
Apart from the Deutsche Telekom case - which, 15 years later in November 2016, resulted in an appellate judgment on common issues by the Frankfurt Higher Regional Court that has since been appealed once again before Germany’s Federal Supreme Court - relatively few model proceedings have been initiated, and even fewer have been completed. This is mostly because the drafters of the KapMuG carefully avoided affording model plaintiffs the extra leverage that, for example, US class actions provide. However, the diesel emissions issue recently inspired KapMuG cases against Volkswagen and Porsche that have much bigger volumes than the Deutsche Telekom case. Moreover, a small number of large individual securities actions brought by litigation SPVs and individual investors in connection with the attempted takeover of Volkswagen by Porsche SE around 2008 was recast as a KapMuG case with a volume of several billion euro. In addition, innumerable individual actions filed by investors are keeping the courts busy.
The 2012 KapMuG reform somewhat increased the popularity of model proceedings, as the legislature introduced an unbureaucratic method of registering additional claims in such proceedings, suspending the statute of limitations and creating de facto precedents for the benefit of the claimants. While on average there were around 30 applications for model proceedings per year under the old regime, this figure has now risen to more than 50 applications per year. It remains to be seen whether this is a short-lived wave of renewed interest, similar to the wave following the introduction of the original KapMuG, or a continuing trend.
Recent developments indicate that institutional investors may have discovered model proceedings as an additional weapon in their arsenal, potentially combining the KapMuG with other securities litigation trends, such as assigning numerous securities claims to litigation vehicles to benefit from various economies of scale. Institutional investors use these litigation vehicles to pool collective claims of, for example, a €1 billion or more in a single action. Such vehicles also have the advantage that litigation funders may cover de facto contingency fees or purchase claims at variable prices. In addition, domestic vehicles may be exempt from providing security for costs and are more likely to be able to avoid cost reimbursement claims from opposing parties. If the litigation vehicle ultimately loses the action, it may avoid having to compensate the defendant’s substantial statutory cost reimbursement claims simply by filing for insolvency.
The German plaintiffs’ bar, which has firmly established itself in the wake of the Deutsche Telekom model proceedings, has also taken to bringing thousands of parallel cases in almost identical ‘copy and paste’ complaints. These cases are often directed at the initiators of investment funds, for example. However, the German plaintiffs’ bar has suffered major setbacks owing to its extensive use of mediation requests to certain publicly recognised mediation providers. In 2015, the Federal Supreme Court held (i) that such mediation requests only toll the statute of limitations if they provide sufficient information to the opposing party to give a reasonable basis for its decision whether or not to participate in the mediation proceedings, and (ii) that, if the opposing party has made clear that it will not participate in such mediation proceedings, the plaintiff may not rely on a subsequent mediation request to toll the statute of limitations.
Moreover, parallel securities claims against initiators of investment funds or issuers are often supplemented by mis-selling claims against brokers and dealers, a trend that has been fuelled by a series of Federal Supreme Court judgments holding that a bank’s failure to disclose sales commissions received behind customers’ backs constitutes mis-selling and gives rise to a damages claim to unwind the tainted transaction. Until 2012, mis-selling claims were excluded from model proceedings, probably also contributing to the KapMuG’s initial lack of popularity.
In 2011, the Federal Supreme Court issued a controversial judgment on complex swap agreements, allowing banks’ counterparties to unwind the transactions under ill-defined conditions. Among other things, the court requires banks to disclose sufficient information to customers to provide a level playing field for the contract negotiations, including disclosure of initial negative market values of the swap from the customer’s perspective. The court’s vague and perhaps indefinable criteria have led to a significant wave of follow-on litigation, enabling municipalities and public utility companies in particular to unwind swap transactions and avoid losses. In 2015, the Federal Supreme Court issued two further opinions on swap agreements, specifying that the initial negative market value generally only has to be disclosed by the bank that is party to the swap agreement, not by third-party investment advisers. This is because in the court’s view the initial negative market value gives rise to a conflict of interest for the swap party that stands to benefit from it. Further, the court held that the duty to disclose the initial negative market value does not exist if the customer enters into the swap agreement to reduce risks inherent in a loan agreement subject to a variable interest rate.
In 2018, the German legislator introduced a new model action allowing certain consumer protection bodies to file declaratory actions to have courts determine liability claims of consumers against commercial parties. This legislation was inspired by the claims of thousands of Diesel car owners against Volkswagen group in connection with the Diesel emissions issue. The first action was filed on 1 November 2018 and by 31 December 2018, more than 300,000 consumers registered their individual claims with the Federal Justice Office. The new legislation combines elements of the KapMuG with elements of the German implementation of the EU Injunctions Directive. While aimed at consumer claims in general, the new legislation may also allow the assertion of securities claims.Available claims
What are the types of securities claim available to investors?
Three basic types of securities claims are available in Germany:
- specific statutory securities claims, for example, for false or misleading material statements in securities prospectuses (statutory prospectus liability), under the German Securities Prospectus Act, the Capital Investment Code and the Capital Investment Act, or for an issuer’s failure to disclose inside information to market participants in a timely and accurate manner (ad hoc liability) under the Securities Trading Act;
- specific ‘common law’ securities claims in analogy to statutory claims, for example, for false or misleading statements in securities prospectuses or other sales materials (civil prospectus liability); and
- general civil claims such as tort or contractual liability applied to securities transactions, for example, implied contractual liability for mis-selling by brokers and dealers or counterparties in private securities offerings.
How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?
In some respects, claims arising out of securities offerings do not differ at all from those based on secondary-market purchases of securities because, for example, the liability for securities offerings on securities exchanges extends to all secondary-market transactions of indistinguishable securities for six months after the securities offering. Moreover, the liability for damages arising out of secondary-market transactions in listed securities is in practice dominated by ad hoc liability under the Securities Trading Act. Secondary-market transactions in unlisted securities, however, are less well protected because securities claims under general tort law often require intent.Public versus private securities
Are there differences in the claims available for publicly traded securities and for privately issued securities?
Yes. Many statutory securities claims are aimed at protecting investors against incorrect public statements and are therefore not applicable to privately issued securities. Courts have, however, to some extent levelled the playing field by assuming contractual causes of action in relation to individual securities transactions that achieve substantially similar results to private securities offerings. By contrast, secondary-market transactions outside of regulated markets are only subject to general tort liability, which often requires intent on the part of the tortfeasor.Primary elements of claim
What are the elements of the main types of securities claim?
Statutory prospectus liability generally requires:
- a prospectus (or in some cases only a summary thereof) containing incorrect or incomplete information that is material for the assessment of the securities;
- a purchase of the securities in reliance on the prospectus;
- intent or gross negligence of the person responsible for the prospectus;
- causation; and
- if the securities are listed on a stock exchange:
- a negative impact of the misrepresented facts on the stock prices; and
- the stocks must have been purchased within six months of a public offering of indistinguishable securities; and
- if the securities are not investment funds under the Capital Investment Code or certain other securities:
- a negative impact of the misrepresented facts on the purchase price of the securities; and
- the securities must have been purchased during and within two years of the beginning of the offering period.
Civil prospectus liability was developed by the courts in analogy to statutory prospectus liability and, therefore, has largely similar requirements. In addition, however, it not only applies to statutory or substantially similar prospectuses, but includes any written marketing materials for securities.
Ad hoc liability requires:
- an issuer’s failure to disclose inside information directly related to the issuer in a timely manner, and:
- a purchase of the securities after the issuer’s failure to disclose the inside information and ongoing ownership of the securities when the inside information becomes public; or
- a purchase of the securities before the inside information comes into existence and a sale of the securities after the issuer’s failure to disclose it;
- an issuer’s disclosure of untrue inside information directly related to the issuer, and:
- reliance on the untrue inside information; or
- a purchase of the securities after the disclosure of untrue inside information; and:
- ongoing ownership of the securities when the inaccuracy of the disclosed inside information becomes public; or
- a sale of the securities before the inaccuracy of the disclosed information becomes public;
- intent or gross negligence of the issuer;
- causation; and
Adviser’s liability requires:
- the implied (or, less common: express) conclusion of an advisory agreement;
- its breach by a failure to advise about:
- all relevant aspects of the potential investment; and
- the investment’s suitability for the prospective investor;
- damages; and
- at the least, negligence of the adviser.
What is the standard for determining whether the offering documents or other statements by defendants are actionable?
A prospectus is incorrect if it contains misstatements about material facts and is incomplete if facts were omitted that would have been material to the investor’s assessment of the securities at the time of publication. The incorrect or omitted information must be material for the assessment of the value of the securities. The prospectus must generally be comprehensible from the perspective of an average reasonable investor who is able to understand the information contained in the prospectus if he or she has carefully read the prospectus and is able to comprehend financial statements, but who has no further special knowledge or education. Higher documentation standards apply if the securities are specifically marketed to a particular group of less sophisticated investors.Scienter
What is the standard for determining whether a defendant has a culpable state of mind?
Statutory prospectus and ad hoc liability require intent or gross negligence (ie, a violation of obvious standards of care), whereas adviser liability only requires negligence (ie, a violation of ordinary standards of care).Reliance
Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?
For statutory prospectus liability, reliance on the prospectus is presumed. The presumption is rebuttable, however, if it can be proved that, on the purchase date, the prospectus no longer influenced buying decisions (eg, due to the later publication of negative financial statements or a significant drop in the securities’ price).
With respect to ad hoc liability, a presumption of reliance is disputed. While some commentators argue that there should be a presumption of reliance comparable to the fraud on the market theory under US law, the German Federal Supreme Court has repeatedly rejected this argument.Causation
Is proof of causation required? How is causation established?
German law generally requires the breach of duty to have been a proximate cause for the damages claimed by the plaintiff.Other elements of claim
What elements present special issues in the securities litigation context?
Where no presumption of reliance exists, such as for ad hoc and adviser’s liability, issues of causation arise. Moreover, the amount of damages caused by inaccurate information is often difficult to establish, but may be estimated by the courts.Limitation period
What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?
The general limitation period runs for three years starting at the end of the year in which both the claim has arisen and the claimant has, or, but for gross negligence, should have gained knowledge of the facts underlying his or her claim, including the identity of the defendant.